A dynasty trust will pass on assets for generations
Spread out before him on a large oak table, the numbers on paper look daunting. Even to Chet Esther, who has managed his multiple-entity farming operation for decades with confidence, the idea of bequeathing large volumes of money to multiple generations is scary.
Chet and his wife, Lori, who farm in Beardstown, Ill., have dreamed of passing on the fruits of their labor to sons Chad and Ryan and to their grandchildren and great-grandchildren. They specifically want to keep the land they own in the family so that estate taxes can’t rob future generations of inheritance.
The Esthers, who farm 4,700 acres and own a construction company and semi-truck and trailer dealership, are participating in the Farm Journal Legacy Project as a succession planning case study family.
The 2010 Tax Relief Act makes it possible to fund a $5 million trust without incurring a gift tax bill. It raises the exemptions for the gift tax and the generation-skipping tax, a levy applied when assets are transferred to relatives who are two or more generations below the donor. Last year, the exemption for those taxes was raised to $5 million per person, or $10 million for a couple, for 2011 and 2012. In 2012, both exemptions are further adjusted for inflation. Prior, the gift-tax exemption was just $1 million per person.
As a result, the use of so-called dynasty trusts, or trusts for the benefit of multiple generations,
are becoming popular. "In working with high-net-worth farm families like the Esthers, we may recommend a dynasty trust to keep land assets in the family and provide financial security," says Kevin Spafford, Farm Journal succession planning expert. From the start, the Esthers have said they want the land to remain with family members. This estate planning tool allows them to:
- reduce the estate tax and protect the land for generations;
- protect assets from the creditors of trust beneficiaries;
- exclude assets from future divorce settlements;
- apply specific terms and conditions to trust distributions; and
- remove appreciating assets (land) from the grantors’ estate.
Building a Dynasty. "Dynasty trust" is not a legal term and it is not found in the tax code. A dynasty trust is an irrevocable trust that is designed to benefit two or more younger generations, says Josh Sylvester, Certified Financial Planner and member of the Legacy Project team.
A dynasty trust will continue as long as legally possible, given state law (see sidebar). It will provide income, and possibly principal, to beneficiaries without transferring ownership of the trust property to the beneficiaries.
A dynasty trust can be established during a person’s lifetime, upon his or her death, or both. A person can transfer up to the gift-tax-applicable exclusion amount ($5 million in 2011). If two spouses each contribute assets to the trust, up to twice this amount can be transferred without incurring a gift tax.
"No one can foresee the future, including the Esthers, but the trust will protect the assets and create a family legacy," Spafford says.
The trust builds a long-term vehicle to hold the Esther farm, says Scott Reynolds, a Legacy Certified Advisor and financial planner with Lincoln Financial Advisors Corp., based in Joliet, Ill. Reynolds is part of the Legacy Project team helping the Esthers.
- Legacy Project 2012 Report